A panel of economists who served in previous Republican administrations said yesterday that President Reagan's budget and economic growth forecasts are not consistent either with current Federal Reserve monetary policy or a continued decline in inflation.
William Fellner, a member of President Ford's Council of Economic Advisers, said the administration is projecting about a 10 percent annual increase in gross national product for several years. "We have never had a period of such increases that was not inflationary," Fellner declared.
Moreover, such large increases in "nominal" GNP--which includes real growth in output and inflation--"are not consistent" with the Federal Reserve's policy of restraining growth of the money supply, Fellner continued.
The "question marks and riddles" of the budget and economic forecast leave the public in doubt about what policy course the president ultimately will choose, Fellner warned. He said heightened uncertainty is damaging the nation's economic prospects.
Herbert Stein, CEA chairman under President Nixon and another member of the panel speaking at a luncheon sponsored by the American Enterprise Institute, echoed Fellner's complaints about the budget inconsistencies, as did Rudy Penner, chief budget economist in the Ford administration.
All three men urged the administration to lower its sights for GNP, though Stein acknowledged that would mean unemployment would come down only very slowly in the years ahead.
Stein said the president relied on the high projected rate of economic growth in order to show the deficit declining from $98.6 billion this year to $53.2 billion in 1987. "Under a constant, instead of a rising, economy, you would have rising deficits," he noted.
In fact, Stein said, "The best guess is that, for political and economic reasons, the deficits will be larger than projected in the budget."
The trio also took exception to claims by administration officials that financing the continuing budget deficits will not be a burden for the economy.
Fellner said that the $83 billion deficit forecast for 1984, for instance, would absorb nearly 30 percent of the approximately $280 billion worth of net new savings that year by individuals, corporations, and state and local governments. Such a high percentage was reached only once so far into an economic expansion--in 1978--he said. The administration has cited that year as part of a period of fiscal policy excesses that contributed to the country's current economic difficulties.
Fellner went on to say that if the administration did not get all of the spending cuts and tax increases it is seeking in the budget, then the proportion of net savings being used to finance deficits in 1983 and beyond would be higher than during any previous expansion.
The three men agreed that in such a case interest rates could rise to new highs relative to inflation.
The increased use of savings to finance budget deficits would "crowd out" private-sector investments that otherwise would be paid for with those funds. Stein said the large deficits were inconsistent with the administration's goals of fostering a rapid increase in private investment, one of the principal reasons for last year's business tax cuts.
Stein rejected claims by Treasury Secretary Donald T. Regan that borrowing to cover deficits placed less of a burden on the private economy than do taxes. If that is the case, he snapped, "It would be interesting to have somebody on his side explain why we have taxes at all."
Penner said the "worst of all worlds" would be one in which financial markets expect the Federal Reserve to ease its current tight money policy to accommodate the budget deficits and achieve the administration's nominal GNP targets, but in which the Fed does not ease. In that case, real interest rates would reach new highs, he said.
The size of the deficits are one reason why interest rates are so high now, Penner said. And he pointed out that a 2-percentage-point rise in long-term interest rates--about what has occurred since the end of November--is enough to wash out the entire effect of the increase in depreciation allowances that was the centerpiece of the business tax cuts passed last year.